There is a lot of hype and excitement around Africa as the next hot spot for global investors but what they are quickly learning is that acquisitions do not come cheap.
Africa, long seen as a basket case and only good as a source of minerals and metals, is turning around: democracy is taking root, wallets are getting fatter and populations younger. The International Monetary Fund sees sub-Saharan Africa growing at 5.4 percent this year against 1.4 percent for rich economies.
Buyers seeking a piece of that future growth are having to pay a premium now because sellers know opportunities with scale are slim. Also, new investors come expecting bargains because the continent is seen as poor.
"Valuations on the whole are challenging at the moment, but that doesn't mean you can't find individual opportunities," said Marlon Chigwende, co-head of sub-Sahara for private equity firm Carlyle Group.
Some bankers say Africa's biggest telecoms operator MTN (MTNJ.J) is a good example of a company that paid what was considered a hefty price at the time, for the right to start operations in Nigeria just over a decade ago.
It paid $285 million for a mobile license in Africa's most populous country. Now it has over 41 million subscribers and banked revenues of 34.9 billion rand ($4.47 billion) in 2011.
The world's biggest retailer Wal-Mart (WMT.N) bought a majority stake in South Africa's Massmart (MSMJ.J) for $2.4 billion in 2011, a 19 percent premium to the 30-day volume weighted average price.
Sub-Saharan Africa's attractiveness as an investment destination has risen to fifth place this year from seventh in 2011, according to a survey by the Emerging Markets Private Equity Association.
Opportunities traditionally existed in mining but speakers at Reuters Africa Investment Summit this week have pointed to consumer and banking services sectors as the next big thing.
Actis, another private equity firm in emerging markets, said it was recently outbid in a North African deal by a trade buyer that offered 12 times EBITDA, or earnings before deductions such as tax and interest.
Valuations on the continent are, however, cheap compared with price demands in bigger emerging economies in Asia.
"Valuations, depending on the sector, can be quite high but ... compare that to the 16 times EBITDA multiple you are being asked for in India or China, that's kind of stratospheric stuff," said John van Wyk, the firm's co-head for the region.
One banker said new investors on the continent came with preconceived ideas of where valuations should be, which was often their first mistake.
"It's one of those things that kill me when people come to Africa: very few people really know anything about Africa but most people come to Africa with a view that ... they have a right to project a view on Africa," he said, preferring to remain anonymous.
FINDING THE RIGHT TARGET
Even where companies are willing to pay a premium for a good target, companies of the right size are hard to come by. Every big African brewer, for example, has been spoken for, according to SABMiller's (SAB.L) head for the region, Mark Bowman.
"No one is getting anything for a reasonable price any more, you are paying for a future opportunity a significant premium. Anything that would become available would be aggressively priced and one would have to take a view if it's worth it," he said.
Diageo coughed up a frothy $225 million for an Ethiopian state brewery last year, months after Heineken (HEIN.AS) paid $163 million for two other beer makers there.
Private equity firms need to avoid auctions to keep a lid on valuations, according Alex-Handrah Aime, a director at Africa-focused Emerging Capital Partners.
The private equity firm is opening an office in Nairobi, its seventh office on the continent, to snatch east African opportunities.
"It's a competitive process. If you end up in an auction situation ... the person who pays the most is going to win. That's not necessarily the valuation that is going to be most sensible," she told Reuters.
One way of bridging the valuation gap is for buyers to start with a convertible bond, instead of taking up equity at the onset, Aime said.
Some investors have simply walked away from hefty prices.
South Africa's second-largest banking group FirstRand (FSRJ.J) dropped its bid for Nigeria's Sterling Bank (STERLNB.LG) last year after the two disagreed on price.
Vendors are playing hard ball knowing well that suitors are desperate to get a toehold on the world's next hot property despite the problems the continent has yet to shake off.
"We are quite bullish about the continent but Africa doesn't come without its challenges," Actis' van Wyk said.
"If you look at the performance of investments we have acquired in our most recent fund, I think there is reason to be quite bullish."
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